Maurice Newman
’s review of
Newcrest Mining
’s great selective briefing kerfuffle is gold standard for all it contains barring, arguably, the caveat-heavy pardon it offers the miner’s disclosure regime.

In one easy, digestible document, the local equity market elder and former ASX chairman has belled the cat on a state of corporate law enforcement that is excessively inscrutable and actively reducing “sensible discretion" through its pursuit of black-letter regulation while offering devastating judgment on the standard of professional market analysis in Australia in the wake of the Global Financial Crisis.

Newman has effectively concluded that well-managed Australian companies increasingly risk the tarnishing of their reputations through the conduct of what are historically very orthodox disclosure regimes that include routine individual meetings with their community of analysts.

Newcrest’s eminence for hire finds that the risks of traditional engagement with the investment market are amplified by the fact that quality analysts are either too thinly spread on the investment banking ground or are operating on too broad a range of companies to effectively digest all that is being said to them.

As a result, Newman recommends that Newcrest specifically, and listed corporate Australia generally, should embrace a new era of prudence in discussion on their fortunes outside of the routine of material disclosure.

Related Quotes

Company Profile

“While stifling dialogue between the company, shareholders and the broker network which falls within the spirit and letter of the continuous disclosure regime may not be optimal for the investing public, it may be the company’s most prudent approach," Newman wrote. “I note that the application of company law is becoming increasingly prescriptive, leaving less room for sensible discretion," he finished.

Blackout period recommended

Newman has recommended, for example, a 14-day investor relations blackout period ahead of “significant" board meetings with exceptions being the gift of the chairman and the managing director.

Newcrest’s board met eight times through FY12 and likely many more times during FY13. Which says only that the effect of an extended blackout could be to close pretty dramatically the window for conversation between company and market.

Newcrest is, rather famously, the target of an active investigation by the Australian Securities and Investments Commission after allegations that the company selectively briefed analysts ahead of a post-board-meeting announcement on June 7 that confirmed a broad-based restructure to protect cash flows, lower profit guidance along with $3.6 billion of write-downs and a further $2.2 billion of impairments on higher-cost assets including the Telfer, Hidden Valley and Bonikro gold mines.

The problem for Newcrest is that, over three days ahead of that announcement, six analysts sent out notes on the company with three of them carrying revised recommendations rating the company a sell.

Those notes were followed by a schedule of meetings between those six analysts and Newcrest’s investor relations manager,
Spencer Cole
. This inspired at least one analyst to complain that Newcrest was selectively briefing the market.

Needless to say, selective briefings on matters as material as $5.8 billion worth of write-downs and impairments would represent not only poor disclosure but also a breach of the law.

Newman’s assessment is that the coincidence of those notes was, well, just coincidence.

“This coincidence of timing seems to have been the catalyst which gave rise to suggestions of “selective briefings. Again, this suggestion has not been validated by my review as I have asked, and been satisfied, that the investor relations function could not have been aware prior to the analyst meetings of the content of the 7 June ASX release.

“Moreover, two brokers,
Merrill Lynch
on 3 June and
CIMB
on 4 June, maintained “buy" calls. In fact, it is difficult to see prior to 7 June any correlation between analyst meetings and daily market behaviour.

“There are days when the share price doesn’t even co-relate with the gold price, moving at times in contrary directions."

Structural fall in gold price

The way Newman has seen things, Newcrest’s analysts either didn’t understand, or didn’t listen to, what they were being told and that, anyway, given the structural fall in the gold price that began in January, they should have anticipated, at very least, the nature and effect of the numbers the market was presented with on June 7.

Now, Newman will doubtless be lambasted for his evident forbearance of Newcrest on the back of his failure to identify a “smoking gun" of general laxity in Newcrest’s investor relations nor of any specific breaches of disclosure convention or law.

To be fair though, Newman was frank in noting he had been unable to speak directly to any of the analysts involved in meetings with Newcrest’s local investor relations pointman. He noted too the concurrence of the review with ASIC’s inquiries had made his task considerably more difficult and that Newcrest’s people had been taken at their word.

Newman’s review then is not yet the definitive narrative on the circumstances that preceded June’s calamity. But that does not mean that it is not a very, very useful little document.

The recommendations offered to Newcrest on future management of disclosure obligations offers a benchmark of best practice that will be circulated to disclosure committees Australia-wide. Just as importantly, the discretely fierce criticisms offered of ASIC and the state of professional analysis will resound and are deserving of some serious reflection.

ASIC rethink urged

Newman has effectively urged ASIC to reconsider its own disclosure obligations, because the regime of secrecy currently required by the regulator is so routinely breached and because, at the same time, that requirement for deep discretion hampers any effort at self-assessment.

“As ASIC can take up to 12 months to complete its inquiries, company reputations can unnecessarily suffer," Newman wrote.

“Moreover, while the representatives of broker firms are aware of the investigation and, while the company has been contacted by ASIC to provide information, ASIC has not publicly stated that it is conducting an investigation.

“Given that it is known that ASIC is conducting an investigation which has made people disinclined to speak to me, it would seem incumbent upon the regulator to advise the market when its investigations begin and, should those investigations be terminated, the date of cessation.

“Otherwise, while my findings may significantly clear the air, for the matter to be fully resolved, the company and the market must await the outcome of ASIC’s inquiries, if indeed, the market is told.

“However, any listed entity which is seeking to clear its name by conducting a thorough and urgent review of its activities and processes will be hampered by a concurrent ASIC investigation. ASIC may wish to review this," he concluded.

For the record, I doubt that very much.

Newman’s views on the stressed state of professional analysis in Australia are probably even more confronting and controversial.

“There is a view that Australia is over-brokered and that analysts are generally less experienced than before the Global Financial Crisis," he said.

“The problem for listed companies is made more difficult by revelations made to me that due to cost cutting, analysts have to cover more companies and so have to spread their time more thinly. The conclusion to draw from this is that the company should be alert to the changed broker and market environment.

“Its response should be greater caution when responding to brokers’ inquiries and when meeting with analysts.

“Despite the fact that the investor relations function understands well its obligations under the law, it seems some market analysts fail to fully understand the relevance of the information that the company releases.

“With the benefit of hindsight, this can lead to misunderstandings, a sense that others have privileged access and disputes and reputational damage may occur."